The ongoing Covid-19 pandemic has caused substantial business disruption across all walks of life. In order to alleviate this disruption, regulators across the world have been responding with various measures aimed at ensuring business continuity, whether its in the form of extensions to statutory limitation periods, offering relief to startups, or advisories to employers to not terminate services of their employers.
Activity in corporate boardrooms across the globe have also been affected due to the pandemic. A number of prominent companies had been putting off their board meetings, on account of the prevalent conditions, in an attempt to limit large gatherings. In India, Piramal Enterprises and Future Lifestyle Fashions Limited were just 2 of the companies that cancelled their board meetings that were scheduled to take place recently. Taking into consideration the difficulties faced by companies and to facilitate social distancing while ensuring a modified form of compliance with the Act, the Ministry of Corporate Affairs issued a notification on March 19, 2020 (“Notification”), altering the compliance requirements with respect to the conduct of board meetings via audio-visual means by companies.
The Companies Act, 2013 (“Act”) already provided for the conduct of board meetings through audio-visual means for some matters. However, this pandemic has prompted the MCA to provide a relaxation with respect to the few reserved matters (or the Prohibited Matters, discussed later on), where companies earlier could not conduct a board meeting through audio-visual means.
In this Note, we discuss the existing provisions of the Act governing board meetings and how the Notification changes compliance for companies in India.
1. When should a company hold board meeting(s), as per the Act?
Conduct of first board meeting
As per Section 173(1) of the Act, every company has to hold the 1st meeting of the board of directors of the company (“Board”) within 30 days of the company’s incorporation.
Conduct of other Board meetings
Section 173(1) of the Act requires the Board of companies to hold a minimum of 4 meetings of the Board every year, with a maximum gap of 120 days between two consecutive meetings, after the 1st meeting.
Special provision for specified companies
As per Section 173(5) of the Act, One Person Companies (having more than 1 director), Small Companies and Dormant Companies are only required to hold 1 Board meeting in each half of the year, and the minimum gap between the 2 Board meetings should be 90 days.
As per Section 2(62) of the Act, “One Person Companies” are companies having only one person as a member.
As per Section 2(85) of the Act, “Small Companies” are companies having a paid up share capital not exceeding INR 50 Lakhs, and having a turnover (in the preceding financial year) not exceeding INR 2 crores. The Act specifically excludes from this definition public companies, holding companies, subsidiary companies, companies incorporated under Section 8 of the Act (Formation of companies with charitable objects, etc.) and companies governed by special parliamentary legislations.
As per Section 455 of the Act, “Dormant Companies” are companies that are formed and registered under the Act for a future project or to hold an asset or intellectual property and have no significant accounting transactions, and may apply to the Registrar of Companies to obtain the status of a dormant company.
What changes does the latest MCA Circular make to the above provisions?
The interval limit for holding Board meetings for all companies other than those specified under Section 173(5), has been extended by the MCA’s General Circular dated March 24th, 2020 (“General Circular”) in light of Covid-19. All companies, whether private, public or not-for profit companies incorporated under Section 8 of the Act, have now been permitted to hold Board meetings with a maximum gap of 180 days between 2 successive board meetings.
In light of Covid-19, this relaxation has been provided to all companies that are mandated by the Act to hold at least 4 Board meetings in a year, till September 30th, 2020, to lighten the burden of compliances upon companies during this period.
2.Can a Board meeting be conducted through video conferencing?
Yes. Under Section 173(2) of the Act, directors are allowed to participate in Board meetings in person, through video conferencing and through other audio-visual means (“Audio Visual Means” or “AVM”). The process for conducting Board meetings through Audio Visual Means is prescribed under Rule 3 of the Companies (Meetings of Board and its Powers) Rules, 2014 (“Rules”).
The following rules are required to be complied with at the time of conducting a Board meeting where directors participate through AVM:
- In the advance notice required to be given to directors to attend the meeting, the option of participating through AVM has to be specifically stated and any information relevant to participating in this manner has to be conveyed to the director (Rule 3(3)(b) of the Rules);
- The notice has to seek advance confirmation from directors regarding the manner in which they want to participate in the meeting, and any intention to participate through AVM have to be conveyed to the Board’s chairperson or the company secretary (“CS”) (Rule 3(3)(c) of the Rules);
- A roll call is required to be taken at the beginning of every Board meeting and recorded along with the minutes of the meeting, specifically mentioning which directors participated through AVM (Rule 3(3)(11) of the Rules);
- Where the director is participating through AVM, he/she has to specify at the commencement of the meeting his/her name, the location from where he/she is participating, acknowledge that the agenda and all relevant material for the meeting has been received by the director and represent that no person other than the director is attending the meeting in person as his/her representative or proxy (Rule 3(4) of the Rules);
- Every director participating through AVM is required to identify himself/herself for the record prior to speaking on any item of business, and at the time of casting his/her vote, and if his/her statement is interrupted or garbled, the same should be repeated (Rule 3(3)(8) of the Rules).
Unless a director is required to be excluded by any provision of the Act from participating in a particular Board meeting, as in case of a meeting to discuss a contract executed or to be executed by a company where the director has an interest in the contract (Section 184(2) of the Act), a director participating through Audio Visual Means shall be counted for the purpose of a quorum (except in case of Prohibited Matters). In case of Prohibited Matters, the physical presence of the directors forming quorum is essential.
Do note that these alternative means adopted should be capable of recording and recognising the participation of the directors and recording and storing the proceedings of such meetings along with the date and time of such meeting, and as long as this is accomplished, any form of AVM would be sufficient to comply with the provisions of the Act.
3.Can a Board Meeting be validly conducted on platforms such as Zoom, Skype etc.?
Yes. A Board meeting can be validly conducted with directors participating through a Zoom/Skype call. The principles for convening and conducting Board meetings are provided in the Secretarial Standard on Meetings of The Board of Directors (“Secretarial Standards”) and the Secretarial Standards define “video conferencing or other audio visual means” (used in Section 173) as “an audio-visual electronic communication facility employed which enables all the persons participating in a meeting to communicate concurrently with each other without an intermediary and to participate effectively in the meeting”. Given that existing technology, particularly softwares such as Zoom/Skype enable multiple individuals to have uninterrupted and effective real time conversations, a compliant Board meeting can be conducted in this manner.
4.What matters can be transacted in Board meetings conducted through AudioVisual Means?
Prior to the Notification of March 19, 2020, Rule 4 of the Rules specified certain matters that could not be transacted in a Board meeting where any of the directors being counted towards a quorum for such matter was participating through AVM (“Prohibited Matters”).
While transacting business related to the below mentioned Prohibited Matters, the physical presence of the quorum was mandatory. This was possibly because there may be several people who are not yet as comfortable making crucial decisions (such as the Prohibited Matters) on a video call and would rather take such decisions in a room where they were face to face and there is no scope for any miscommunication or missing out on any point that was discussed.
Prior to the Notification, the below mentioned Prohibited Matters, could not be discussed in a meeting where part or whole of the quorum was participating through AVM:
However, where at least such number of directors as required to constitute a valid quorum (as per the articles of association) were present physically at the venue of the Board meeting, other directors could participate in the meeting dealing with these matters through Audio Visual Means.
What changes now vis-à-vis the above mentioned Prohibited Matters?
The latest Notification has been occasioned because of Covid-19, where physical presence of Directors at one place is not only impossible (due to the lockdown) but also highly impractical and dangerous. Hence, the MCA has now permitted companies to transact business on all items, including the abovementioned Prohibited Matters, via Audio Visual Means until June 30, 2020 (“Deadline”). The Government of India has taken into consideration the grave nature of the current situation, where social distancing is not just a strategy, but a necessity and it is essential to curb any form of gathering.
5.Why is the relaxation with respect to the Prohibited Matters restricted to the Deadline and why can’t it be introduced in the long run?
It appears that this relaxation vis-à-vis Prohibited Matters has been provided only for a limited period of time considering the difficulties associated with large scale or even small scale gatherings during this pandemic.
Since the subject-matters outlined in the Prohibited Matters are considered to be of vital importance, the Government appears to be reluctant to do away with the previous requirement of the physical presence of all directors constituting atleast the minimum quorum.
The provisions of the Act pertaining to participation of directors in Board meetings through AVM has helped companies to ensure participation of directors in Board meetings whether or not their individual circumstances enable them to be physically present at the meeting. This was particularly significant since often, the same person could hold the position of a director in multiple companies, making it tedious to be physically present for each board meeting.
By introducing the General Circular and the Notification, the MCA has attempted to alleviate the burden on companies to comply with the Act’s provisions pertaining to the conduct of Board meetings, though there may be a few glitches in actually making these meetings a reality. Since everyone is required to work from home or remain on unpaid leave or just stay indoors, there is a considerable strain on telecommunication networks, particularly due to a surge in video consumption via over-the-top platforms (“OTT”). In this situation, it may not be as easy to have uninterrupted Board meetings over the Internet as one may expect. The extension of the interval limit between consecutive Board meetings, will be a good resolution for the short term, till the uncertainty regarding the impact and reach of the coronavirus subsides a little.
Further, though the MCA has been compelled by the Covid-19 crisis to relax the restrictions vis-à-vis Prohibited Matters, in the long term it may be helpful to allow companies to conduct their Board meetings for transacting all items of the business via Audio Visual Means, thereby streamlining the process of decision-making within companies.
In a few states in the USA, the concept of virtual shareholders’ meetings is already quite popular. Section 211(a)(1) of the Delaware General Corporation Law allows companies to hold virtual-only meetings by means of remote forms of communication. On the other hand, in the state of New York, subject to authorization by the board of directors, companies are required to provide shareholders the opportunity to participate through remote communication if certain statutory conditions are met.
With technological improvements, video calling has become easier and smoother to have large scale discussions and meetings, and with appropriate safeguards in the law, it may be possible to allow Board meetings where all participants are remotely located and are able to decide upon all matters pertaining to the Company’s operations, without any restrictions.
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Disclaimer: This post has been prepared for informational purposes only. The information/or observations contained in this post does not constitute legal advice and should not be acted upon in any specific situation without seeking proper legal advice from a practicing attorney.